Central banks, particularly the US Federal Reserve, may be underestimating inflation risks amid optimistic growth forecasts.
This is according to Dutch asset manager Robeco, which argued in its 2025 outlook that the current economic situation should not be misinterpreted as a typical cyclical landing or recession.
The report, titled “this is not a landing”, suggested that while the US economy may appear to have a cyclical landing – downside risks still persist.
Although all the typical signs of a cyclical landing are present (an inverted yield curve and subsequent re-steepening, a Sahm rule triggering, a persistent manufacturing slump), Robeco argues that “this is not actually a landing”.
“Misjudging the nature of the landing by having the wrong perspective could remain a key risk for market observers and central bankers in 2025,” the report said.
“Whether and how we land is likely more dependent on the quality of the runway (productivity growth/labour force growth) than on aircraft pilots’ skills (central bankers and politicians).”
Risks lurking beneath the surface
Although the US has managed to evade a recession so far, “its strong GDP growth numbers hide sizeable downward adjustments beneath the surface,” the report said.
“The notable respective declines in US job openings per unemployed, fulltime private employment growth, quits rates due to declining wage premium for job movers, and rising household delinquencies all show the Fed rate hikes have lowered aggregate demand.”
As such, Robeco’s base case for 2025 is “another year of a treacherous macro climate with many idiosyncratic cross winds”.
“By occasionally signalling some economic weakness, the data will blur broader economic resilience,” the report said.
“Central bankers need to tread carefully. By underestimating inflation risks in 2025 relative to growth risks, they could cause excessive easing (lowering actual policy below the natural rate), bringing an inflationary inflection point forward in time against a backdrop of reinvigorated procyclical fiscal policy and higher cost-push inflation due to tariffs.”
Inflation and a slowdown
Due to the lagged impact of Fed tightening and the potential inflationary effect of Trump tariffs and restrained immigration, Robeco flagged potential stagflation risks in 2025.
“While our outlook on US nominal growth is still optimistic, our estimate of real GDP growth at 1.7% (below consensus) and inflation at 2.75% (above consensus) provide a stagflationary twist when it comes to anticipated macro surprises in 2025,” the report said.
In the firm’s bear case for 2025, the soft-landing currently priced into consensus expectations “prove to be a pipe dream”.
They said the escalating number of state-led conflicts could potentially force governments to boost military expenditures, alongside embarking on reckless fiscal spending which could worsen inflation and rattle the bond market.
The report said: “Trump’s favorite word, ‘tariffs’, reawakens fears from nearly a century ago: The SmootHawley Tariff Act (1930) significantly raised US tariffs on thousands of imported goods, resulting in other countries retaliating with their own tariffs on US goods, drastically restricting US exports.”
The report warned that this act worsened trade well into the 1930s and ultimately led to the Great Depression.
This uncertain macro backdrop of course has implications for risk assets and equities, which are richly valued.
“The path for equities may be treacherous as the incoming macro data will sometimes represent a hard landing narrative,” the report said.
“Historically stretched US valuation levels against a backdrop of elevated geopolitical risk leaves the market susceptible to (deep) sell-offs.”
